Bond Market Update

iFAST Research Team February 25, 2015

  • Over the week ended 17 September 2015, yields fell across the board while credit spreads tightened
  • US High Yield (-0.2%) underperformed as spreads widened marginally; Asian High Yield outperformed, returning 0.3% over the week
  • US sovereign yields barely changed; 10-year US Treasury yield lower by -0.7bps to 2.18%
  • Short SGD rates still near highest levels since Dec 2008; 3-month SIBOR and SOR at 1.13933% and 1.33757% respectively
  • Real estate bonds outperformed; Evergrande, Central China Real Estate, Country Garden and Sunac amongst the outperformers
  • Quiet week for new issuance on FOMC uncertainty; look out for new USD issues from Trade Development Bank of Mongolia, Islamic Republic of Pakistan, Weichai Power Hong Kong, BOC Aviation's asset-backed notes

Market overview [as of 17 September 2015]

Yields fell, Fed on hold

Over the week ended 17 September 2015, yields fell across the board while credit spreads tightened. Investors were on edge with the much-anticipated FOMC meeting scheduled over the week, but the Fed stood pat and kept interest rates unchanged. Spreads tightened the most in higher-yielding Asian debt, with a -13bps narrowing of spreads in the Asian real estate bond space. Bucking the trend was the US High Yield market which lost -0.2% as yields rose marginally; Asian High Yield gained 0.3% as yields declined.

SGD short rates remain elevated

For sovereign yields, longer-maturity US Treasury yields were largely unchanged (the 10-year US Treasury yield was at 2.18%, -0.7bps lower over the week), while short SGD rates remained near their highest levels since December 2008, a function of continued USD appreciation expectations. As of 17 September, the 3-month SIBOR and SOR rates were at 1.13933% and 1.33757% respectively. In Hong Kong, yields were largely unchanged over the week, with the 10-year Hong Kong Government Bond yield finishing the week at 1.743%.

Upgrade for CGNPC's bonds

Over the week, Fitch Ratings upgraded China General Nuclear Power Corporation's (CGNPC) senior unsecured rating from A to A+ (CHGDNU 4.000% 19May2025 Corp (USD), while affirming its rating on CGNPC at A+. This matches Fitch Rating's sovereign credit rating for China (A+), highlighting the firm's "strategic importance to the state and substantial tangible support it consistently received from the state"; the bonds were recently quoted at a YTM of 3.92%/3.989%.

Real Estate Bonds outperformed

Asian real estate bonds outperformed over the week, led by the likes of Evergrande, Central China Real Estate, Country Garden and Sunac. EVERRE 12.000% 17Feb2020 Corp (USD)s were higher by 1.5% over the week (to yield 11.9%) while the EVERRE 8.750% 30Oct2018 Corp (USD)s were up by a similar margin of 1.5% to yield 10.3%. Central China Real Estate's CENCHI 6.500% 04Jun2018 Corp (USD)s outperformed with a 3.2% week-on-week gain, brushing off weakness following S&P's "negative" outlook on the firm; the USD bonds now yield 8.17% (ask).

Amongst the underperformers in the Asia ex-Japan credit space was a distressed name, Berau Coal Energy (-15%); the bonds are now quoted at 37 cents on the dollar on restructuring uncertainty. San Miguel Corporation's SMCGL 6.750% Perpetual Corp (USD) was a notable underperformer, losing -6% over the week on news that the state's Power Sector Assets (PSALM) has attempted to terminate its contract with San Miguel over a contract dispute on San Miguel's 1,200MW Ilijan plant. The situation remains fluid with San Miguel Corp now attempting to sue PSALM over the breach of contract, while San Miguel Corp shares have since fallen over -40% since its February highs.

New issuance expected to recover

It has been a quiet period for new issuance, primarily attributed to the interest rate hike uncertainty leading up to the September FOMC meeting. With the Fed currently on hold, investors can look towards new issues from entities like the Trade Development Bank of Mongolia, the Islamic Republic of Pakistan, Wenchai Power Hong Kong, as well as an asset backed note securitised by aircraft and leases (formerly owned by BOC Aviation).

 

The Research Team is part of iFAST Financial Pte Ltd.